By Adam Leitman Bailey and Dov Treiman
With the passage in June, 2019 of the HSTPA, owners are desperately seeking ways out of rent regulation in an attempt to recapture the profitability their buildings previously had.
Two such exit strategies are “substantial rehabilitation,” available only to deteriorated buildings and “demolition,” generally available to rent stabilized buildings regardless of their condition.
Administering Rent Regulation
Governing the demolition process is DHCR’s Operational Bulletin 2009-1. This
bulletin deals with demolition applications for three scenarios: rent control,
rent stabilization, and non-New York City rent stabilization. The rules are
radically stricter for rent controlled apartments than for New York City rent
stabilization. In these matters, the courts grant extreme deference to the DHCR
includes when the DHCR decides it wants to reconsider matters on its own after
a case has gone up for Article 78 review. Under its administration, the DHCR has worked
without a specific definition of demolition, but an intent to gut the interior
of the building, while leaving the walls intact, has been held as sufficient. Use
of the process is mandatory; self-help is prohibited. The building need not be
razed to the ground.
Stipends
An essential part of the entire process is the system of
stipends. The landlord has not only to be prepared to pay the stipends, but to
prove to the DHCR the ability to do so.
Each tenant who is being evicted is entitled to receive from
the landlord the tenant’s reasonable moving expenses. This means that in order
to make the application, the landlord is going to have to come up with
estimates as to what the moving expenses will be. Landlorda can and must obtain
from a moving company estimated costs based on room count for a move entirely
within NYC. The moving expenses are in addition to the other stipend discussed
herein.
There are provisions for reducing the stipends, but these are
based on tenant conduct and the application process must assume that each tenant
will receive the full stipend to which they are entitled. The deduction cannot
be known at the time of the initial application because it consists of a
reduction of one-sixth for each month the tenant stays past the time allowed
under the order (and lease) to remain in the premises, a figure unknowable
until the order has actually been issued.
In the stipending system, the landlord has three options:
The first option is moving the tenant to a new apartment at
the same or lower regulated rent near or in the building being built. For such
tenants, the stipend is $5000. This option entails the landlord finding the new
apartment.
The second option is moving the tenant to a more expensive
apartment where the landlord prepays six years worth of the difference in rent.
This option also entails the landlord finding the new apartment.
The third option is using the stipend chart from the
Operational Bulletin where the landlord pays the tenant for a minimum of three
rooms, the difference between the current rent and the chart’s stipend amount
as adjusted by the RGB increases issued since the Operational Bulletin ($639.21
in 2019), multiplied by the number of rooms and further multiplied by 72. This,
the most popular option, entails the landlord having no obligation to find the
new apartment.
Tenants who would lose governmental benefits because of the stipends may waive them.
Special Consideration for Rent Control
Demolition is only a ground for removal from rent control if the
landlord is putting up a new building which must have at least 20% more
apartments than the old building, except if
the cost of repairing the violations in the building exceeds the assessed value
of the building. Then it need not be more than one more apartment in the new
building, unless the building is already largely vacant. The landlord must move the rent controlled tenants to a new apartment. The building permits must already be in place. The landlord must demonstrate that there is
no reasonable possibility that the landlord can make a net annual return of
8.5% of the assessed value of the subject property and that lower return is not
the landlord’s fault.
The Steps
Not all buildings are well suited for a demolition
application. Unlike “substantial rehabilitation,” there is no requirement that
the building be in deteriorated condition in order to qualify for a demolition
application. If a building is genuinely eligible for demolition treatment, the
DHCR does not have the discretion to refuse the application.
Landlords will want to buy out rent controlled tenants before
anyone knows demolition is in the air. However, landlords must exercise extreme
caution in these buyout negotiations as they can readily run afoul of the Anti-harassment
provisions of the law such as those found in the New York City Administrative
Code.
It is not necessary to pre-approve loans, but the Owner has to
be able to demonstrate that either the deed owner of the building or a closely
related entity has the wherewithal for the project, if not necessarily cash on
hand. The DHCR examines not only the ability to pay for the tearing down of the
building, but all of the other expenses associated with the project. The DHCR
specifies in its publications what these expenses should minimally include.
The
Application
The application is actually a fairly simple form to which one
attaches such additional documents as appear useful. The agency’s discretion lies
in determining whether to authorize a refusal to offer lease renewals
based on whether 1) applicant has established financial ability to demolish
building, 2) plans for the undertaking have been approved by appropriate
agency, and 3) applicant has complied with statutory provisions for relocation
of rent stabilized tenants, reimbursement of moving expenses, and payment of
stipends. Neither the DHCR nor
the courts will allow extensive discovery. Various proofs of financial ability
are possible. If the financing is through a closely related entity, the
landlord’s application should be explicit in setting forth that relationship. Enough copies of the application must be
provided to the DHCR for them to serve each tenant. Since the attachments can
get lengthy, this can mean significant printing expenses. It is not necessary that the actual building
permits be attached to the application as it takes so much time for the DHCR to
go through its procedure in approving the application that the permits would
become stale. However, where applicable, Certificates of No Harassment must be
pulled as prerequisites to the permits and they too can become stale if pulled
too soon. Such certificates are themselves a lengthy procedure, the details of
which are outside the scope of this article.
Any Golub or eviction notices already issued should be attached to the
application. The application should
include engineering and architectural plans with the financials including
specific reference to those specific plans.
Once the application has been filed, the Owner can immediately stop
renewing leases. This requires issuing Golub notices to all the tenants. These
are served in the normal Rent Stabilization methods, either by regular or
certified mail.
The DHCR has exacting requirements for the contents of the Golub
notice which drafters must precisely follow.
Rents cannot be increased for any reason during the pendency
of the application. If the application is denied, the Owner loses the increases
that could have been charged and lease renewals are made on the usual 90-day
notice to the tenants, with rents frozen until the offer is accepted. The DHCR will direct such other proceedings
as it determines which could even include evidentiary hearings, but will not
necessarily include such hearings. The
DHCR has historically taken an
inordinately long time to process the application but there are ways to
facilitate the process.
The landlord selects apartments if using the two methods for calculating the stipends that entail selecting apartments. The tenant has a right to challenge the suitability of such selected apartment.
The landlord pays the stipends when the tenants move. Tenants’
delay or refusal to move reduces or eliminates their entitlement to the stipend
and subjects them to eviction proceedings.
Tenants have until the later of the expiration of their lease or the
date set forth in the DHCR’s order to move out. If they do not move out on
their own, the actual eviction of the tenants is by way of an ordinary holdover
eviction proceeding in Civil Court. However, if the Owner has a favorable
decision from the DHCR, there is nearly nothing to prove in that proceeding,
making it amenable to summary judgment.
Conclusion
Demolition proceedings before the DHCR are extremely technical
and require precise adherence to the exacting requirements of the various laws.
Expect these applications to take years
and be battled in the courts. However,
they are also one of very few options rent regulated landlords have left to
restore profitability to their properties and deregulate buildings with rent
regulated apartment in the aftermath of the new draconian laws.
